# Event Contracts > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-12125 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** June 10, 2024 - **Citation:** 89 FR 48968 ## Text COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 40 RIN 3038-AF14 Event Contracts AGENCY: Commodity Futures Trading Commission. ACTION: Notice of proposed rulemaking. SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) is proposing amendments to its rules concerning event contracts in certain excluded commodities. The Commission is proposing amendments to further specify types of event contracts that fall within the scope of section 5c(c)(5)(C) of the Commodity Exchange Act (CEA or the Act) and are contrary to the public interest, such that they may not be listed for trading or accepted for clearing on or through a CFTC-registered entity. Among other things, the Commission proposes to further specify the types of event contracts that involve “gaming.” The Commission also proposes to amend certain language in its event contract rules to further align with statutory text, and to make certain technical changes to its event contract rules in order to enhance clarity and organization. DATES: Comments must be received on or before July 9, 2024. ADDRESSES: You may submit comments, identified by “Event Contracts” and RIN number 3038-AF14, by any of the following methods: • CFTC Comments Portal: https://comments.cftc.gov. Select the “Submit Comments” link for this release and follow the instructions on the Public Comment Form. • Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. • Hand Delivery/Courier: Follow the same instructions as for Mail, above. Please submit your comments using only one of these methods. Submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to https://comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (“FOIA”), a petition for confidential treatment of the exempt information may be submitted according to the Commission's procedures established in 17 CFR 145.9. The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under FOIA. FOR FURTHER INFORMATION CONTACT: Grey Tanzi, Assistant Chief Counsel, (312) 596-0635, gtanzi@cftc.gov, Division of Market Oversight, Commodity Futures Trading Commission, 77 West Jackson Blvd., Suite 800, Chicago, Illinois 60604, Andrew Stein, Assistant Chief Counsel, (202) 418-6054, astein@cftc.gov, Lauren Bennett, Assistant Chief Counsel, (202) 418-5290, lbennett@cftc.gov, or Nora Flood, Chief Counsel, (202) 418-6059, nflood@cftc.gov, Three Lafayette Centre, 1151 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. Overview of Proposed Changes to § 40.11 B. Commission History With Event Contracts C. Statutory Authority and Prior Commission Action 1. CEA Section 5c(c)(5)(C) 2. Commission Regulation § 40.11 3. Commission Determinations Pursuant to § 40.11 II. Proposed Amendments to § 40.11 A. Amendments to Further Align With Statutory Language 1. Description of Excluded Commodities (a) Proposed Amendments (b) Illustrative Examples of Event Contracts Not Within Scope of CEA Section 5c(c)(5)(C) and § 40.11 2. Contracts That “Involve” an Enumerated Activity B. The Enumerated Activities 1. Gaming (a) Background (b) Proposed Gaming Definition (c) Illustrative Examples of Gaming 2. The Other Enumerated Activities C. Public Interest Considerations 1. Overview of Proposed Amendments 2. Factors Considered by the Commission in Evaluating Whether a Contract, or Category of Contracts, Is Contrary to the Public Interest 3. The Enumerated Activities (a) Terrorism, Assassination, and War (b) Activity That Is Unlawful Under Federal or State Law (c) Gaming D. The Commission's Authority To Identify Additional Similar Activities to the Enumerated Activities E. Technical Amendments 1. Technical Amendments to § 40.11(a) 2. Technical Amendments to § 40.11(c) F. Implementation Timeline III. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act 1. Submission of Updated Rules to the Commission 2. Request for Comment C. Consideration of Costs and Benefits 1. Introduction 2. Proposed Amendments (a) Definition of Gaming—Proposed § 40.11(b) (1) Baseline and Proposed Amendments (2) Benefits (3) Costs (b) Amendments to Further Align With Statutory Language 3. Section 15(a) Factors (a) Protection of Market Participants and the Public (b) Efficiency, Competitiveness and Financial Integrity (c) Price Discovery (d) Sound Risk Management Practices (e) Other Public Interest Considerations D. Antitrust Considerations I. Background A. Overview of Proposed Changes to § 40.11 On July 27, 2011, the Commission published in the Federal Register final rules under part 40 of the Commission's regulations, including new § 40.11. 1 Commission Regulation 40.11 was promulgated pursuant to authority granted under section 5c(c)(5)(C) of the CEA, 2 which was added by section 745(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). 3 CEA section 5c(c)(5)(C) authorizes the Commission to prohibit certain “event contracts” from being listed or made available for clearing or trading on or through a registered entity, 4 if such contracts involve an activity that is enumerated in CEA section 5c(c)(5)(C) or “other similar activity” as determined by the Commission by rule or regulation, and the Commission determines that such contracts are contrary to the public interest. 1 Provisions Common to Registered Entities, 76 FR 44776 (July 27, 2011). Commission Regulation 40.11 was adopted as part of broader changes made to part 40 of the Commission's regulations to implement section 745 of the Dodd-Frank Act, which amended section 5c of the CEA. Section 5c(c) of the CEA, in particular, sets forth requirements relating to the listing for trading or making available for clearing of derivative contracts, and the implementation of rules and rule amendments, by “registered entities.” CEA section 1a(40), 7 U.S.C. 1a(40), defines the term “registered entity” to include any board of trade designated by the Commission as a contract market (“DCM”), and any derivatives clearing organization (“DCO”), swap execution facility (“SEF”), or swap data repository (“SDR”) registered by the Commission. 2 7 U.S.C. 7a-2(c)(5)(C). 3 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (July 21, 2010). 4 See note 2, supra. CEA section 1a(40), 7 U.S.C. 1a(40), defines the term “registered entity” to include any DCM, and any DCO, SEF, or SDR registered by the Commission. While the term “event contract” is not defined in the CEA or the CFTC's regulations, event contracts are generally understood to be a type of derivative contract, typically with a binary payoff structure, based on the outcome of an underlying occurrence or event. 5 A registered entity that seeks to list event contracts for trading, or make event contracts available for clearing, must comply with the substantive and procedural requirements that apply, more generally, to the listing for trading, or making available for clearing, of derivative contracts. For example, CFTC-registered exchanges—namely, DCMs and SEFs—are subject to statutory requirements to only list or permit trading in derivative contracts that are not readily susceptible to manipulation; 6 to enforce compliance with contract terms and conditions; 7 and to monitor trading on the exchange in order to prevent manipulation, price distortion, and disruption of the settlement process through market surveillance, compliance, and enforcement practices and procedures. 8 In addition to the more generally applicable requirements to which registered entities are subject when listing derivative contracts for trading or making such contracts available for clearing, CEA section 5c(c)(5)(C) grants the Commission the authority to prohibit registered entities from listing for trading or making available for clearing particular types of event contracts, if the Commission determines that such contracts are contrary to the public interest. 5 Most event contracts that have traded or are currently trading on CFTC-registered exchanges are structured as binary options, which are generally understood as a type of option whose payout is either a fixed amount or zero. 6 See Core Principle 3 for DCMs, CEA section 5(d)(3), 7 U.S.C. 7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3), 7 U.S.C. 7b-3(f)(3). 7 See Core Principle 2 for DCMs, CEA section 5(d)(2), 7 U.S.C. 7(d)(2), and Core Principle 2 for SEFs, CEA section 5h(f)(2), 7 U.S.C. 7b-3(f)(2). 8 See Core Principle 4 for DCMs, CEA section 5(d)(4), 7 U.S.C. 7(d)(4), and Core Principle 4 for SEFs, CEA section 5h(f)(4), 7 U.S.C. 7b-3(f)(4). Since 2021, the Commission has observed a significant increase in the number of event contracts listed for trading by CFTC-registered exchanges, as well as in the diversity of occurrences and events underlying such contracts. 9 The Commission has also observed recent applications for exchange registration, and expressions of interest regarding exchange registration, from entities that have indicated that they are interested primarily, or exclusively, in listing event contracts for trading. 10 9 From 2006-2020, DCMs listed for trading an average of approximately five event contracts per year. In 2021, this number increased to 131, and the number of newly-listed event contracts per year has remained at a similar level in subsequent years. Since 2021, DCMs also have listed for trading a substantial number of event contracts not associated with traditional commodities, financial indices, or economic indicators. These have included event contracts based on the occurrence or non-occurrence of international events, natural disasters in specific U.S. cities, heating/cooling degree days and cumulative average temperature in specific cities, the timing of video game and album releases, Oscar award winners, COVID-19 case levels and restrictions, the outcome of cases pending before the Supreme Court of the United States, the passage of specific laws by the U.S. Congress, U.S. Presidential approval ratings, confirmation of U.S. executive branch officials, National Football League (“NFL”) television ratings, the discovery of exoplanets, and the occurrence of a National Aeronautics and Space Administration moon landing before a certain date. 10 As of February 12, 2024, Commission staff were reviewing several pending applications for contract market designation from entities with a stated interest in offering event contracts for trading. Commission staff have received multiple additional inquiries from other entities indicating an interest in applying for exchange registration in order to offer event contracts for trading. In light of these developments, the Commission proposes to amend § 40.11 to further specify types of event contracts that fall within the scope of CEA section 5c(c)(5)(C) and are contrary to the public interest. The Commission believes that these amendments would support efforts by registered entities to ensure compliance with the CEA by more clearly identifying the types of event contracts that may not be listed for trading or accepted for clearing. The Commission believes that these amendments would, correspondingly, assist registered entities, as well as applicants for registration, in making informed business decisions with respect to product design, which would help to support responsible market innovation. The Commission believes that amending § 40.11 to further specify types of event contracts that may not be listed for trading or accepted for clearing would also benefit the Commission and its staff, by reducing the need to undertake individualized, resource-intensive contract reviews. As further discussed below, under § 40.11(c), the Commission may initiate a 90-day review to evaluate whether a particular event contract is of a type that may not be listed for trading or accepted for clearing. Further specifying, in § 40.11, the types of event contracts that may not be listed for trading or accepted for clearing should provide registered entities with a better understanding regarding appropriate event contract parameters and should, in turn, reduce the likelihood that contract filings that raise potential public interest concerns are submitted to the Commission. From a resource allocation perspective, this will be of significant benefit to the Commission and its staff, since, in the Commission's experience, a single § 40.11(c) review is resource-intensive and consumes hundreds of hours of staff time. Finally, the Commission proposes to make certain amendments to § 40.11 to further align the language of the regulation with the statutory text of CEA section 5c(c)(5)(C), and also proposes to make certain technical amendments to the regulation in order to enhance clarity and organization. B. Commission History With Event Contracts CFTC-registered exchanges have listed a variety of event contracts for trading for several decades. 11 On February 18, 2004, the Commission designated the first contract market dedicated to trading event contracts. 12 In 2008, the Commission published a concept release (the “2008 Concept Release”), requesting input from interested persons, and those with expertise, on the appropriate regulatory treatment of event contract markets. 13 The 2008 Concept Release was prompted by the Commission's receipt of a substantial number of requests for guidance related to application of the CEA to event contract markets. 14 The Commission sought both general input and responses to 24 enumerated questions. The Commission received 31 comments in response to the 2008 Concept Release, 15 but ultimately did not take further action at that time. In 2010, Congress addressed the Commission's regulatory authority with respect to certain event contracts in section 745(b) of the Dodd-Frank Act, which added section 5c(c)(5)(C) to the CEA. Thereafter, in 2011, the Commission adopted § 40.11, which implements CEA section 5c(c)(5)(C). 11 Since 1992, CFTC-registered exchanges have listed for trading event contracts involving interests such as regional insured property losses, the count of bankruptcies, temperature volatilities, corporate mergers, and corporate credit events. See Concept Release on Appropriate Regulatory Treatment of Event Contracts, 73 FR 25669, 25671 (May 7, 2008). 12 See CFTC Order of Designation for HedgeStreet, Inc. (“HedgeStreet”) (Feb. 20, 2004), available at https://www.cftc.gov/sites/default/files/opa/press04/opa4894-04.htm (last visited Mar. 7, 2024). HedgeStreet listed daily and weekly event contracts on various corporate mergers, weather events, and economic indicators. Effective June 21, 2009, HedgeStreet changed its name to North American Derivatives Exchange, Inc., or “Nadex.” Nadex continues to list event contracts on foreign exchange, equity indices, commodity prices, and digital assets. 13 73 FR 25669. 14 Id. 15 See Comment File for Federal Register Release 73 FR 25669, CFTC, https://www.cftc.gov/LawRegulation/PublicComments/08-004.html (last visited Mar. 7, 2024). As discussed above, in recent years, the Commission has observed applications for exchange registration, and expressions of interest regarding exchange registration, from entities that appear to be interested primarily, or exclusively, in listing event contracts for trading. 16 The Commission also has observed a significant increase in the number of event contracts listed for trading by registered entities, and in the diversity of occurrences and events underlying such contracts. 16 The Commission's Division of Market Oversight (“DMO”) also has issued staff no-action positions to two academic institutions which provide that, subject to specified terms, DMO will not recommend to the Commission enforcement action against the academic institutions for operating, without registration as a DCM, SEF, or foreign board of trade (“FBOT”), small-scale, not-for-profit markets that offer trading in political and economic indicator event contracts for academic purposes. See CFTC Staff Letter No. 93-66 issued to the University of Iowa (June 18, 1993), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/93-66.pdf. This no-action position superseded the operative terms of a more limited no-action position issued in 1992. See also CFTC Staff Letter No. 14-130 issued to Victoria University of Wellington, New Zealand (Oct. 29, 2014), available at https://www.cftc.gov/csl/14-130/download. The terms of these staff no-action positions contemplate that each event market will be operated by the relevant academic institution for academic purposes and without compensation. The terms of the no-action positions also contemplate limitations on, among other things, the number of market participants and the number of contracts that each market participant may hold. In issuing each of the no-action positions, DMO explicitly noted that it was not rendering an opinion on the legality of the academic institutions' activities under state law. C. Statutory Authority and Prior Commission Action 1. CEA Section 5c(c)(5)(C) As discussed above, a registered entity that seeks to list event contracts for trading, or accept such contracts for clearing, must comply with the substantive and procedural requirements that apply, more generally, to the listing for trading or acceptance for clearing of derivative contracts. 17 Notably, for example, a DCM or SEF is required to ensure that the derivative contracts that it lists or permits for trading are not readily susceptible to manipulation; to ensure enforcement of the terms and conditions of those contracts; and to monitor trading in those contracts in order to prevent manipulation, price distortion, and disruption of the settlement process. 18 CEA section 5c(c)(5)(C) further grants the Commission the authority to prohibit registered entities from listing or making available for clearing or trading certain event contracts that involve particular activities, if the Commission determines that such contracts are contrary to the public interest. 17 Registered entities seeking to list event contracts for trading, or accept such contracts for clearing, must abide by the CEA and Commission regulations, including applicable statutory core principles. See, e.g., CEA section 5(d), 7 U.S.C. 7(d) (Core Principles for DCMs); CEA section 5b(c)(2), 7 U.S.C. 7a-1(c)(2) (Core Principles for DCOs); CEA section 5h(f), 7 U.S.C. 7b-3(f) (Core Principles for SEFs). In addition, registered entities seeking to list event contracts for trading, or accept such contracts for clearing, must comply with the submission requirements set forth in CEA section 5c(c), 7 U.S.C. 7a-2(c)(1), and part 40 of the Commission's regulations. 18 See Core Principle 3 for DCMs, CEA section 5(d)(3), 7 U.S.C. 7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3), 7 U.S.C. 7b-3(f)(3); Core Principle 2 for DCMs, CEA section 5(d)(2), 7 U.S.C. 7(d)(2), and Core Principle 2 for SEFs, CEA section 5h(f)(2), 7 U.S.C. 7-b3(f)(2); and Core Principle 4 for DCMs, CEA section 5(d)(4), 7 U.S.C. 7(d)(4), and Core Principle 4 for SEFs, CEA section 5h(f)(4), 7 U.S.C. 7b-3(f)(4). For the avoidance of doubt, regardless of whether or not a particular event contract falls within the scope of CEA section 5c(c)(5)(C) and § 40.11, the DCM or SEF seeking to list the event contract for trading has a statutory obligation to ensure that the event contract is not readily susceptible to manipulation. Section 5c(c)(5)(C) was added to the CEA by section 745(b) of the Dodd-Frank Act, which amended, more generally, the contract and rule submission requirements set forth in CEA section 5c(c). In a short colloquy with the late Senator Diane Feinstein on the Senate floor regarding the proposed Dodd-Frank Act provision that ultimately was enacted as CEA section 5c(c)(5)(C) (the “2010 Colloquy”), Senator Blanche Lincoln, then-Chair of the Senate Committee on Agriculture, Nutrition, and Forestry—who is identified in the 2010 Colloquy as one of the authors of CEA section 5c(c)(5)(C)—stated that the provision was intended to assure that the Commission “has the power to prevent the creation of futures and swaps markets that would allow citizens to profit from devastating events and also prevent gambling through futures markets.” 19 19 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche Lincoln), available at https://www.congress.gov/111/crec/2010/07/15/CREC-2010-07-15-senate.pdf (last visited Mar. 7, 2024). CEA section 5c(c)(5)(C)(i) provides that in connection with the listing of agreements, contracts, transactions, or swaps in excluded commodities 20 that are based upon the occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or levels of a commodity described in section la(2)(i) of this title), 21 by a designated contract market or swap execution facility, the Commission may determine that such agreements, contracts, or transactions are contrary to the public interest if the agreements, contracts, or transactions involve—(I) activity that is unlawful under any Federal or State law; (II) terrorism; (III) assassination; (IV) war; (V) gaming; or (VI) other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest. 22 20 The term “excluded commodity” is defined in CEA section 1a(19), 7 U.S.C. 1a(19), as: (i) an interest rate, exchange rate, currency, security, security index, credit risk or measure, debt or equity instrument, index or measure of inflation, or other macroeconomic index or measure; (ii) any other rate, differential, index, or measure of economic or commercial risk, return, or value that is—(I) not based in substantial part on the value of a narrow group of commodities not described in clause (i); or (II) based solely on one or more commodities that have no cash market; (iii) any economic or commercial index based on prices, rates, values, or levels that are not within the control of any party to the relevant contract, agreement, or transaction; or (iv) an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described in clause (i)) that is—(I) beyond the control of the parties to the relevant contract, agreement, or transaction; and (II) associated with a financial, commercial, or economic consequence. 21 There is no “section 1a(2)(i)” in the CEA. As discussed in section II.A.1.a, infra, the Commission believes that the reference in CEA section 5c(c)(5)(C)(i) to “section 1a(2)(i)” is a typographical or drafting error. 22 CEA section 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i). CEA section 5c(c)(5)(C)(ii) provides that no agreement, contract or transaction 23 determined by the Commission to be contrary to the public interest under section 5c(c)(5)(C)(i) may be listed or made available for clearing or trading on or through a registered entity. 24 23 CEA section 5c(c)(5)(C)(i) applies in connection with the listing of agreements, contracts, transactions, or swaps by a DCM or SEF. 7 U.S.C. 7a-2(c)(5)(C)(i). The Commission notes that similar phrases both later in CEA section 5c(c)(5)(C)(i) and in CEA section 5c(c)(5)(C)(ii) refer only to “agreements, contracts, or transactions . . . .” The Commission interprets either phrase to encompass derivative contracts listed for trading on or through DCMs or SEFs, and for simplicity refers to “agreements, contracts, transactions or swaps” as “contracts” herein. 24 CEA section 5c(c)(5)(C)(ii); 7 U.S.C. 7a-2(c)(5)(C)(ii). The Commission interprets CEA section 5c(c)(5)(C) to contemplate that the Commission engage in a two-step inquiry. First, the Commission must assess whether a contract in a specified excluded commodity “involve[s]” an activity enumerated in CEA section 5c(c)(5)(C)(i)(I)-(V) (each, an “Enumerated Activity”) or other similar activity as determined by the Commission by rule or regulation (“prescribed similar activity”). If the Commission determines that the contract involves such activity, the Commission must assess whether the contract is contrary to the public interest. The Commission interprets CEA section 5c(c)(5)(C) to provide that the contract may not be listed or made available for clearing or trading by a registered entity if the Commission finds both that (i) the contract involves an Enumerated Activity or prescribed similar activity, and (ii) the contract is contrary to the public interest. 2. Commission Regulation 40.11 In 2011, the Commission adopted § 40.11 to implement CEA section 5c(c)(5)(C) as part of broader changes to the Commission's part 40 regulations. 25 Commission Regulation 40.11(a)(1) provides that a registered entity shall not list for trading or accept for clearing on or through the registered entity an agreement, contract, transaction, or swap based upon an excluded commodity, as defined in Section 1a(19)(iv) of the Act, that involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law. 26 Although they are not listed in precisely the same order, the activities enumerated in § 40.11(a)(1) are the same as the activities enumerated in CEA sections 5c(c)(5)(C)(i)(I)-(V) and are similarly referred to herein as the Enumerated Activities. 25 Part 40 of the Commission's regulations, more generally, implements the contract and rule submission requirements for registered entities set forth in CEA section 5c(c). For example, § 40.2 sets forth the general process by which a DCM or SEF may list a new derivative contract for trading by providing the Commission with a written certification—a “self-certification”—that the contract complies with the CEA, including the CFTC's regulations thereunder. See also CEA section 5c(c)(1), 7 U.S.C. 7a-2(c)(1). The Commission must receive the DCM's or SEF's self-certified submission at least one business day before the contract's listing. 17 CFR 40.2(a)(2). Commission Regulation 40.3 sets forth the general process by which a DCM or SEF may elect voluntarily to seek prior Commission approval of a derivative contract that the DCM or SEF seeks to list for trading. See also CEA sections 5c(c)(4)-(5), 7 U.S.C. 7a-2(c)(4)-(5). Amendments to an existing derivative contract also must be submitted to the Commission either by way of self-certification or for prior Commission approval. 17 CFR 40.5, 40.6. 26 17 CFR 40.11(a)(1). Consistent with CEA section 5c(c)(5)(C)(i)(VI), § 40.11(a)(2) provides that a registered entity shall not list for trading or accept for clearing on or through the registered entity an agreement, contract, transaction, or swap based upon an excluded commodity, as defined in Section 1a(19)(iv) of the Act, that involves, relates to, or references an activity that is similar to an activity enumerated in § 40.11(a)(1), and that the Commission determines, by rule or regulation, to be contrary to the public interest. 27 To date, the Commission has not made any such determinations. 27 17 CFR 40.11(a)(2). CEA section 5c(c)(5)(C) applies with respect to agreements, contracts, transactions, or swaps in excluded commodities that are based upon the occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or levels of a commodity described in section 1a(2)(i)). There is no “section 1a(2)(i)” in the CEA, and the Commission believes the reference to this provision in CEA section 5c(c)(5)(C) is a typographical or drafting error. In adopting §§ 40.11(a)(1) and (2), as well as § 40.11(c), the Commission interpreted CEA section 5c(c)(5)(C) to apply with respect to the excluded commodities defined in CEA section 1a(19)(iv). See discussion in section II.A.1.a, infra. Pursuant to § 40.11(c), when a contract submitted to the Commission by a registered entity, pursuant to § 40.2 or § 40.3, may involve, relate to, or reference an activity enumerated in §§ 40.11(a)(1) or (2), the Commission is authorized to commence a 90-day review of the contract. 28 The Commission must issue an order approving or disapproving the contract by the end of the 90-day review period or, if applicable, at the conclusion of any extended period agreed to or requested by the registered entity. 29 Commission Regulation 40.11(c)(1) requires the Commission to request that the registered entity suspend the listing or trading of the contract during the 90-day review period. 30 The Commission also must post on its website a notification of the intent to carry out a 90-day review. 31 28 17 CFR 40.11(c). Commission Regulation 40.11(c) states that the 90-day review period shall commence from the date the Commission notifies the registered entity of a potential violation of § 40.11(a). 29 17 CFR 40.11(c)(2). 30 17 CFR 40.11(c)(1). 31 Id. The Commission did not, in § 40.11 or in the 2011 adopting release for the rule, define any of the Enumerated Activities. The Commission acknowledged, in the adopting release, a comment on the rule proposal that stated that the term “gaming,” in particular, should be further defined in order to enhance clarity regarding the scope of the prohibition set forth in § 40.11(a)(1). 32 The Commission expressed agreement with the interest to further define “gaming” for purposes of the prohibition, 33 and stated that the Commission might issue a future event contracts rulemaking that, among other things, addressed the appropriate treatment of event contracts involving gaming. 34 The Commission stated that, in the meantime, it had determined to adopt the prohibition set forth in § 40.11(a)(1) with respect to the Enumerated Activities, “and to consider individual product submissions on a case-by-case basis under § 40.2 or § 40.3.” 35 32 Provisions Common to Registered Entities, 76 FR 44776, 44785 (July 27, 2011). 33 Id. 34 Id. 35 Id. The Commission noted that a registered entity could receive a definitive resolution of any questions concerning the applicability of § 40.11(a)(1) by submitting a particular contract for Commission approval under § 40.3: if the submitted contract was approved by the Commission, the registered entity would have assurance that the Commission had reviewed and did not object to the submission based on the prohibitions in § 40.11(a). Id. at 44785-86. The Commission noted that, alternatively, a registered entity could self-certify a contract under § 40.2 and, if the Commission determined during its review of the contract “that the submission may violate the prohibitions in § 40.11(a)(1)-(2), the Commission may request that the registered entity suspend the trading or clearing of the contract pending the completion of a 90-day . . . review.” Id. at 44786. The Commission stated that, upon completion of that review, the Commission would be required to issue an order finding either that the contract violated, or did not violate, the prohibitions in § 40.11(a)(1)-(2). Id. 3. Commission Determinations Pursuant to § 40.11 To date, the Commission has issued two final determinations pursuant to § 40.11. On January 3, 2012, the Commission commenced a 90-day review, under § 40.11(c), of certain event contracts on election outcomes that had been self-certified by Nadex. 36 On April 2, 2012, the Commission issued an order (the “Nadex Order”) prohibiting the contracts from being listed or made available for clearing or trading, finding that the contracts involved the Enumerated Activity of gaming and were contrary to the public interest. 37 36 See https://www.cftc.gov/PressRoom/PressReleases/6163-12. Nadex self-certified cash-settled, binary contracts on whether there would be a Democratic majority in the U.S. House of Representatives (“House”); whether there would be a Republican majority in the House; whether there would be a Democratic majority in the U.S. Senate (“Senate”); and whether there would be a Republican majority in the Senate. The contracts settled based on whether the named party held the majority of seats in the identified chamber of Congress on the expiration date. Nadex also self-certified ten cash-settled, binary contracts on the upcoming Presidential election. Each contract was based on one of the leading candidates for President and paid according to whether that candidate won the Presidency. 37 See CFTC Release No. 6224-12 CFTC Issues Order Prohibiting North American Derivatives Exchange's Political Event Derivatives Contracts (Apr. 2, 2012), available at https://www.cftc.gov/PressRoom/PressReleases/6224-12. On June 23, 2023, the Commission commenced a 90-day review, under § 40.11(c), of certain event contracts self-certified by KalshiEX LLC (“Kalshi”) that were based on which political party controlled each chamber of Congress. 38 On September 22, 2023, the Commission issued an order (the “Kalshi Order”) prohibiting the contracts from being listed or made available for clearing or trading, finding that the contracts involved the Enumerated Activities of gaming and activity that is unlawful under State law, and that the contracts were contrary to the public interest. 39 The Kalshi Order is currently under judicial review in the U.S. District Court for the District of Columbia. 40 38 See CFTC Release No. 8728-23, CFTC Announces Review of Kalshi Congressional Control Contracts and Public Comment Period (June 23, 2023), available at https://www.cftc.gov/PressRoom/PressReleases/8728-23. The Kalshi contracts were cash-settled, binary contracts that settled based on the party affiliation of the leader of the identified chamber of Congress on the expiration date. The Kalshi contracts differed from the Nadex contracts that the Commission had previously disapproved, in that the Nadex contracts settled based on the number of seats in the House or Senate held by a given political party, while the Kalshi contracts settled based on the party affiliation of the leader of the House (the Speaker) or the leader of the Senate (the President Pro Tempore). 39 See CFTC Release No. 8780-23, CFTC Disapproves KalshiEX LLC's Congressional Control Contracts (Sept. 22, 2023), available at https://www.cftc.gov/PressRoom/PressReleases/8780-23. 40 KalshiEx LLC v. Commodity Futures Trading Commission, 1:23-cv-03257 (filed Nov. 1, 2023) (D.D.C.). The Commission has exercised its authority to commence a 90-day review of event contracts, pursuant to § 40.11(c), on two additional occasions. 41 On December 23, 2020, the Commission commenced a 90-day review of certain event contracts that had been self-certified by Eris Exchange, LLC (“ErisX”), that were based on the moneyline, the point spread, and the total points for individual NFL games. 42 On August 26, 2022, the Commission commenced a 90-day review of certain Congressional control event contracts submitted for Commission approval by Kalshi. 43 In both of these instances, the submitting parties withdrew their respective contracts from consideration before the Commission issued a final determination pursuant to § 40.11. 41 In so doing, the Commission found, pursuant to § 40.11(c), that the subject contracts “may” involve an Enumerated Activity. 17 CFR 40.11(c). 42 See CFTC Release No. 8345-20, CFTC Announces Review of RSBIX NFL Futures Contracts Proposed by Eris Exchange, LLC (Dec. 23, 2020), available at https://www.cftc.gov/PressRoom/PressReleases/8345-20. 43 See CFTC Release No. 8578-22, CFTC Announces Review and Public Comment Period of KalshiEx Proposed Congressional Control Contracts Under CFTC Regulation 40.11, available at https://www.cftc.gov/PressRoom/PressReleases/8578-22. II. Proposed Amendments to § 40.11 In light of (i) the significant increase that the Commission has observed in the number and diversity of event contracts listed for trading by Commission-registered exchanges, and (ii) the increased interest that the Commission has observed, among applicants and prospective applicants for exchange registration, in operating exchanges that would primarily or exclusively offer event contracts for trading, the Commission is proposing to amend § 40.11 to, among other things, further specify types of event contracts that fall within the scope of CEA section 5c(c)(5)(C) and are contrary to the public interest, such that they may not be listed for trading or accepted for clearing on or through a registered entity. As discussed above, the Commission believes that these proposed amendments would support efforts by registered entities to ensure compliance with the CEA, and would, correspondingly, assist registered entities, as well as applicants for registration, in making informed business decisions with respect to product design, thereby helping to support responsible market innovation. The Commission further believes that, by helping to delineate appropriate event contract parameters, the proposed amendments would reduce the frequency of event contract submissions to the Commission that raise potential public interest concerns, which would allow for more efficient use of Commission and staff resources by reducing the need to conduct individualized event contract reviews pursuant to § 40.11(c). It may also yield efficiencies for registered entities by helping to avoid situations where they expend resources to develop and submit a contract that the Commission subsequently determines, following a § 40.11(c) review, may not be listed for trading or accepted for clearing. In addition, the Commission is proposing to make certain amendments to § 40.11 to further align the language of the regulation with the statutory text of CEA section 5c(c)(5)(C), and also is proposing to make certain technical amendments to the regulation to enhance clarity and organization. A. Amendments to Further Align With Statutory Language 1. Description of Excluded Commodities (a) Proposed Amendments CEA section 5c(c)(5)(C) applies with respect to agreements, contracts, transactions, or swaps in excluded commodities that are based upon the occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or levels of a commodity described in section 1a(2)(i)). 44 There is no “section 1a(2)(i)” in the CEA, and the Commission believes the reference to this provision in CEA section 5c(c)(5)(C) is a typographical or drafting error. 45 In adopting § 40.11, the Commission interpreted the “excluded commodities” falling within the scope of CEA section 5c(c)(5)(C) to be those set forth in CEA section 1a(19)(iv), and accordingly referenced CEA section 1a(19)(iv) in §§ 40.11(a)(1)-(2) and § 40.11(c). 46 44 CEA section 5c(c)(5)(C)(i); 7 U.S.C. 7a-2(c)(5)(C)(i). 45 CEA section 1a(2), 7 U.S.C. 1a(2), defines an “appropriate Federal banking agency,” which is not relevant to the excluded commodity definition. 46 While the adopting release did not discuss the basis for this interpretation, it is likely that the Commission assumed that Congress intended to incorporate the statutory language of the “excluded commodity” definition set forth in CEA section 1a(19)(iv), since CEA section 5c(c)(5)(C) tracks the language of CEA section 1a(19)(iv) to a large extent. The “excluded commodity” definition set forth in CEA section 1a(19)(iv) is as follows: an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described in clause (i)) that is—(I) beyond the control of the parties to the relevant contract, agreement, or transaction; and (II) associated with a financial, commercial, or economic consequence. “[C]lause (i)” refers to CEA section 1a(19)(i). With the aim of adhering as closely as possible to the statutory text—while, by necessity, having to account for the errant reference in CEA section 5c(c)(5)(C) to “section 1a(2)(i),” which is not a provision in the statute—the Commission is proposing to amend §§ 40.11(a)(1)-(2) and § 40.11(c) to refer to agreements, contracts, transactions, or swaps in excluded commodities based on the occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or levels of a commodity described in section 1a(19)(i) of the Act). These proposed amendments would achieve two purposes. First, the proposed amendments would remove from the relevant rules the current reference to CEA section 1a(19)(iv) and would more precisely track the text of CEA section 5c(c)(5)(C). Second, the proposed amendments would clarify the Commission's interpretation that the reference to “section 1a(2)(i)” in CEA section 5c(c)(5)(C) was intended by Congress to refer to the excluded commodities described in CEA section 1a(19)(i), namely, an interest rate, exchange rate, currency, security, security index, credit risk or measure, debt or equity instrument, index or measure of inflation, or other macroeconomic index or measure. This interpretation carves out from the scope of CEA section 5c(c)(5)(C) event contracts based on a change in the price, rate, value, or levels of these measures, indices, and instruments. The measures, indices, and instruments described in CEA section 1a(19)(i) served as underlyings for a range of derivative contracts that were broadly traded on CFTC-registered exchanges at the time of enactment of CEA section 5c(c)(5)(C). 47 As such, the Commission believes that it is unlikely that Congress intended the heightened authority granted to the Commission in CEA section 5c(c)(5)(C) to apply with respect to event contracts based on changes in the price, rate, value or levels of these measures, indices, and instruments. 48 The Commission notes that it has not historically recognized these types of event contracts as falling within the scope of CEA section 5c(c)(5)(C) and, by extension, § 40.11. 47 These included derivative contracts based on changes in the Consumer Price Index (“CPI”), home price indices for various U.S. cities, U.S. Initial Jobless Claims, and Gross Domestic Product (“GDP”). 48 Consistent with the Commission's view that the reference to “section 1a(2)(i)” in CEA section 5c(c)(5)(C) was intended by Congress to refer to the excluded commodities described in CEA section 1a(19)(i), section 201(b) of the CFTC Reauthorization Act of 2019 included, as a technical correction to the CEA, the replacement of the reference to “section la(2)(i)” with a reference to “section 1a(19)(i).” CFTC Reauthorization Act of 2019, H.R. 6197, 116th Cong. (2d. Sess. 2020). (b) Illustrative Examples of Event Contracts Not Within the Scope of CEA Section 5c(c)(5)(C) and § 40.11 The Commission believes that registered entities and market participants would benefit from the Commission providing examples of the types of event contracts that, in the Commission's view, fall outside of the scope of CEA section 5c(c)(5)(C) and, by extension, § 40.11. 49 The Commission believes that, among other things, this will assist registered entities, as well as applicants for registration, in making informed business decisions with respect to product design, thereby supporting responsible innovation. The Commission believes that this also will support the more efficient use of CFTC staff resources in connection with the review of event contract submissions. 49 For the avoidance of doubt, with respect to these types of event contracts, a registered entity still must comply with the substantive and procedural requirements that apply, more generally, to the listing for trading or acceptance for clearing of derivative contracts, including, for DCMs and SEFs, the statutory requirement to ensure that such contracts are not readily susceptible to manipulation. While the Commission cannot anticipate every contract design, the Commission believes that event contracts based on a change in the price, rate, value, or levels of the following would generally fall outside of the scope of CEA section 5c(c)(5)(C) and § 40.11: • Economic indicators, including the CPI and other price indices; the U.S. trade deficit with another country; measures related to GDP, jobless claims, or the unemployment rate; and U.S. new home sales; • Financial indicators, including the federal funds rate; total U.S. credit card debt; fixed-rate mortgage averages ( e.g., the 30-year fixed-rate mortgage interest rate); and end of day, week, or month values for broad-based stock indexes; and • Foreign exchange rates or currencies. Request for Comment The Commission requests comment on all aspects of its proposal to amend the language of §§ 40.11(a)(1)-(2) and 40.11(c) to more precisely track, in the description of “excluded commodities,” the text of CEA section 5c(c)(5)(C). In particular, the Commission requests comment on its interpretation that the reference to “section 1a(2)(i)” in the parenthetical in CEA section 5c(c)(5)(C)(i) is a typographical or drafting error, and that the intention was to refer to the excluded commodities described in CEA section 1a(19)(i). The Commission further requests comment on the examples provided of event contracts that the Commission believes would generally fall outside of the scope of CEA section 5c(c)(5)(C) and § 40.11. In particular, the Commission requests comment on the following questions: • Are there additional types of event contracts that should be explicitly identified by the Commission in the non-exclusive list of contract types that would generally fall outside of the scope of CEA section 5c(c)(5)(C) and § 40.11? • What indices or measures are “other macroeconomic index[es] or measure[s]” for purposes of CEA section 1a(19)(i)? Are tax rates ( e.g., corporate and capital gains tax rates) among such macroeconomic measures? 2. Contracts That “Involve” an Enumerated Activity CEA section 5c(c)(5)(C) applies with respect to event contracts in certain excluded commodities that “involve” one of the Enumerated Activities or a prescribed similar activity. In adopting § 40.11, the Commission described the types of event contracts that may not be listed for trading or accepted for clearing as contracts that involve, relate to, or reference one of the Enumerated Activities or a prescribed similar activity. 50 Commission Regulation 40.11(c) further provides that the Commission may engage in a 90-day review of an event contract if the contract may involve, relate to, or reference an Enumerated Activity or a prescribed similar activity. 51 50 17 CFR 40.11(a)(1) and (2). While there are no prescribed similar activities at this juncture, the Commission retains its authority under CEA section 5c(c)(5)(C)(i)(VI) and § 40.11(a)(2) to prescribe similar activities in future rules or regulations. 51 17 CFR 40.11(c). In order to further align the language of the regulation with the statutory text of CEA section 5c(c)(5)(C), the Commission proposes to amend § 40.11 to remove the terms “relate to” and “reference” wherever they appear and to simply refer to event contracts that “involve” an Enumerated Activity or prescribed similar activity. The proposed amendments would reaffirm the scope of the Commission's prohibition authority and the standard of review that applies with respect to an event contract pursuant to § 40.11. The proposed amendments would also be consistent with the determinations made by the Commission in the Nadex Order and the Kalshi Order, both of which focused on whether the event contracts in question “involved” an Enumerated Activity. 52 The proposed amendments are not intended to alter the scope of the Commission's prohibition authority or the nature of the Commission's analysis to determine whether a particular event contract falls within the ambit of CEA section 5c(c)(5)(C) and § 40.11. 52 See Kalshi Order at 5-7; Nadex Order at 2. The term “involve” is not defined in the CEA, so the Commission gives the term its ordinary meaning. 53 Definitions of “involve” include “to relate to or affect,” “to relate closely,” to “entail,” or to “have as an essential feature or consequence.” 54 In this regard, the Commission reiterates that a contract may “involve” an Enumerated Activity, or prescribed similar activity, in circumstances where such activity is not, itself, the contract's underlying. 55 By its plain meaning, a contract “involves” its underlying, but it also involves other characteristics. Further, where the CEA specifies a contract's underlying, it uses the word “underlying,” 56 or, as syntax requires, it refers to what the contract is “based on” 57 or “based upon.” 58 53 See Asgrow Seed Co. v. Winterboer, 513 U.S. 179, 187, 115 S.Ct. 788 (1995); see also Morrisette v. United States, 342 U.S. 246, 263, 72 S.Ct. 240 (1952) (holding that undefined statutory words that are not terms of art are given their ordinary meanings, frequently derived from the dictionary). 54 See “involve” definition, Merriam-Webster.com, available at https://www.merriam-webster.com/dictionary/involve (last visited Mar. 7, 2024); Random House College Dictionary 703 (Revised ed. 1979); Riverside University Dictionary 645 (1983) 645; see also Roget's International Thesaurus 1040 (7th ed. 2010) (giving as synonyms “entail” and “relate to”). 55 See Kalshi Order at 5-7; Nadex Order at 2. 56 E.g., 7 U.S.C. 6c(d)(2)(A)(i), 20(e), 25(a)(1)(D)(ii). 57 E.g., 7 U.S.C. 2(a)(1)(C)(i)(I), 2(a)(1)(C)(iv), 6b(e). 58 E.g., 7 U.S.C. 2(a)(1)(C)(ii). Beyond the plain meaning of “involve,” the full text of CEA section 5c(c)(5)(C)(i) demonstrates that a contract “involve[s]” more than just its underlying: the provision uses the terms “based upon” and “involve” in the same sentence and differentiates between the two. First, CEA section 5c(c)(5)(C)(i) states that the provision applies with respect to agreements, contracts, transactions, or swaps in excluded commodities that are based upon the occurrence, extent of an occurrence, or contingency. 59 In other words, the contract's underlying must be an event. Then, just a few words later, CEA section 5c(c)(5)(C)(i) states that “such agreements, contracts, or transactions” must “involve” an Enumerated Activity or prescribed similar activity. In context, “based upon” and “involve” must have different meanings, with “based upon” referring to the underlying, and requiring only that it be an event, and “involve” retaining its broader ordinary meaning and referring not just to the underlying, but to “such agreements, contracts, or transactions” as a whole. 59 7 U.S.C. 7a-2(c)(5)(C). In effect, Congress's choice of the broader term “involve” means that CEA section 5c(c)(5)(C) encompasses both event contracts whose underlying is an Enumerated Activity or prescribed similar activity, and event contracts with a different connection to an Enumerated Activity or prescribed similar activity, because, for example, they “relate closely” to, “entail,” or “have as an essential feature or consequence” such activity. The legislative history of CEA section 5c(c)(5)(C) supports the plain meaning of the statutory text in this regard. During the 2010 Colloquy, Senator Lincoln stated that, among other things, CEA section 5c(c)(5)(C) was intended to “prevent gambling through futures markets” and to restrict derivatives exchanges from “construct[ing] an `event contract' around sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament.” 60 None of the Super Bowl, the Kentucky Derby, or the Masters Golf Tournament are, of themselves, “gaming.” 61 Rather, the statement of Senator Lincoln—who, as noted above, is identified in the 2010 Colloquy as one of the authors of CEA section 5c(c)(5)(C)—focuses on the overall characteristics of the contract. As noted in the Nadex Order and the Kalshi Order, this legislative history supports the plain meaning of the term “involve,” and indicates that the question for the Commission in evaluating whether a contract “involves” an Enumerated Activity or prescribed similar activity is whether the contract, considered as a whole, involves one of those activities. 62 60 See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche Lincoln). 61 As noted in the Kalshi Order, it is difficult to conceive of a contract whose underlying event, itself, is “gaming.” If “involve” were to refer only to a contract's underlying, contracts based on sporting events such as horse races and football games would not qualify, because sports typically are not understood to be “gaming”—they are understood to be “games.” In effect, if “involve” were to refer only to a contract's underlying, the scope of certain prongs of CEA section 5c(c)(5)(C) could effectively be limited to a null set of event contracts, which could not have been Congress's intent. Kalshi Order at 7, note 18. 62 Nadex Order at 2; Kalshi Order at 7. For example, giving the term its ordinary meaning, a contract “involves” an Enumerated Activity or prescribed similar activity if trading in the contract amounts to such activity. Id. at 7, note 19. Request for Comment The Commission requests comment on all aspects of its proposal to amend § 40.11 to remove the terms “relate to” and “reference” wherever they appear, and to refer in the regulation only to event contracts that “involve” an Enumerated Activity or prescribed similar activity. B. The Enumerated Activities 1. Gaming (a) Background Neither the CEA nor current § 40.11 define “gaming” or any of the other Enumerated Activities. While acknowledging, in the adopting release for § 40.11, the interest expressed by certain commenters to further define the term “gaming” for purposes of the regulation, the Commission deferred at the time from doing so, indicating that it would instead “consider individual product submissions on a case-by-case basis under § 40.2 or § 40.3.” 63 63 Provisions Common to Registered Entities, 76 FR 44776, 44785 (July 27, 2011). Since the adoption of § 40.11 in 2011, as part of the agency's standard product review process, CFTC staff have evaluated whether event contracts in certain excluded commodities may implicate CEA section 5c(c)(5)(C) and § 40.11, and in four instances the Commission has commenced a review pursuant to § 40.11(c) to evaluate whether event contracts implicated one of the Enumerated Activities. In each of these four instances, a § 40.11(c) review was commenced, in part, to evaluate whether the event contracts in question implicated gaming. 64 64 See https://www.cftc.gov/PressRoom/PressReleases/6163-12 (2011 Nadex contracts); https://www.cftc.gov/PressRoom/PressReleases/8345-20 (2020 ErisX contracts); https://www.cftc.gov/PressRoom/PressReleases/8578-22 (2022 Kalshi contracts); https://www.cftc.gov/PressRoom/PressReleases/8728-23 (2023 Kalshi contracts). Based upon its experience administering CEA section 5c(c)(5)(C) pursuant to § 40.11, the Commission believes that defining the term “gaming” within § 40.11 will assist in establishing a common understanding and more uniform application of the term. It will thereby assist registered entities, and applicants for registration, in their product design efforts, and benefit market participants and the public by helping to ensure that event contracts listed for trading and accepted for clearing by registered entities are consistent with the requirements of the CEA and § 40.11. The Commission notes that there may continue to be instances where contract-specific reviews are commenced pursuant to § 40.11(c) in order to evaluate whether a contract involves “gaming,” as proposed to be defined. However, the Commission expects that establishing a definition, and thereby a common understanding of the term, will help to reduce the frequency of these reviews. (b) Proposed Gaming Definition The Commission proposes to define “gaming” in new § 40.11(b)(1) as the staking or risking by any person of something of value upon: (i) the outcome of a contest of others; (ii) the outcome of a game involving skill or chance; (iii) the performance of one or more competitors in one or more contests or games; or (iv) any other occurrence or non-occurrence in connection with one or more contests or games. 65 This proposed definition is consistent with the Commission's interpretation of the term “gaming” in the Nadex Order and the Kalshi Order, 66 and draws upon the ordinary meaning of the term 67 and relevant state and federal statutory definitions, as discussed below. The Commission wishes to make it clear that its proposed definition of “gaming” would not have applicability beyond the CFTC's administration of CEA section 5c(c)(5)(C) and § 40.11. 65 The Commission considers the term “contest” to have its ordinary meaning, and to encompass a “competition.” See, e.g., MERRIAM-WEBSTER.COM , available at https://www.merriam-webster.com/dictionary/contest (last visited Mar. 7, 2024) (defining the noun “contest” as: “1) a struggle for superiority or victory: competition; 2) a competition in which each contestant performs without direct contact with or interference from competitors”). 66 See Nadex Order at 2-3; Kalshi Order at 8-10. 67 See note 70, infra. The proposed definition recognizes—as the Commission did in the Nadex Order and the Kalshi Order 68 —that the terms “gaming” and “gambling” are used interchangeably in common usage and dictionary definitions. 69 The proposed definition further recognizes that, under a number of state statutes, “gambling,” “betting,” or “wagering” is recognized to include a person staking or risking something of value upon a game or contest, or the performance of competitors in a game or contest. 70 Further, a federal statute, the Unlawful internet Gambling Enforcement Act (“UIGEA”), defines the term “bet or wager” as the staking or risking by any person of something of value on the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome. 71 68 Nadex Order at 2-3; Kalshi Order at 8-9. 69 For example, Dictionary.com defines “gaming” as, e.g., “gambling.” See “gaming” definition, Dictionary.com, https://www.dictionary.com/browse/gaming (last visited Feb. 2, 2024). Black's Law Dictionary also refers to “gambling” as “gaming” and cross-refers the definition of gaming to gambling. See “GAMING Definition & Legal Meaning,” Black's Law Dictionary, 2nd Ed., available at https://thelawdictionary.org/gaming/ (last visited Mar. 22, 2024). Further, many state agencies that regulate gambling are known as “gaming” commissions. See, e.g., Nevada Gaming Commission and Nevada Gaming Control Board, https://gaming.nv.gov/ (last visited Mar. 7, 2024); New York State Gaming Commission, https://www.gaming.ny.gov/ (last visited Mar. 1, 2024); Illinois Gaming Board, https://www.igb.illinois.gov/ (last visited Mar. 7, 2024). 70 See, e.g., Ga. Code Ann. section 16-12-21(a)(1) (West 2020) (A person commits the offense of gambling when he makes a bet upon the partial or final result of any game or contest or upon the performance of any participant in such game or contest.); Tex. Penal Code Ann. section 47.02(a) (West 2019) (A person commits an offense of gambling if he: (1) makes a bet on the partial or final result of a game or contest or on the performance of a participant in a game or contest”). See also note 75, infra. 71 31 U.S.C. 5362(1)(A). The UIGEA, 31 U.S.C. 5361-5367 (2006), prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the internet and that is unlawful under any federal or state law. Unlike the Wire Act, 28 U.S.C. 1084 (1961), the UIGEA defines a “bet”, but it criminalizes it only if it is connected with unlawful internet gambling that violates any federal or state law. See 31 U.S.C. 5362. The UIGEA does not alter the definitions in other federal and state laws and expressly excludes any transaction conducted on or subject to the rules of a registered entity or exempt board of trade under the CEA from the definition of “bet or wager.” See id. at section 5362(1)(E). Accordingly, the Commission believes that it is appropriate, for purposes of defining “gaming” within § 40.11, to focus on the staking or risking of something of value upon a contest of others or a game, including the outcome of such contest or game, the performance of competitors in such contest or game, 72 or other occurrences or non-occurrences in connection with such contest or game. As noted above, this proposed approach draws upon the approach taken in relevant state and federal statutes to defining the terms “gambling,” “betting,” and “wagering.” In this regard, the proposed approach is consistent with indications of the intent of the drafters of CEA section 5c(c)(5)(C). In the 2010 Colloquy, Senator Lincoln stated that the provision was intended, in part, to assure that the Commission had the authority to “prevent gambling through futures markets.” 73 72 This would include the performance of one or more athletes in one or more games, as well as the performance of one or more competitors in one or more auto, drone, boat, horse, or similar competitions. In addition, this would include performance in any “fantasy” or simulated contest or league in which participants own or manage an imaginary or theoretical team and compete against other participants based on the performance of such teams or team members. 73 See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (statement of Sen. Blanche Lincoln). The Commission acknowledges that several state statutes recognize “gambling,” “betting,” or “wagering,” to encompass, more broadly, a person staking or risking something of value upon the outcome of any contingent event not in the person's influence or control—and not just a game or a contest of others. 74 The Commission is not proposing to define “gaming” in this manner. The Commission recognizes that this broader definition could encompass event contracts that were not intended by Congress to be subject to the Commission's heightened authority pursuant to CEA section 5c(c)(5)(C), including the types of event contracts described in section II.A.1.b, supra. To avoid going beyond what Congress may have intended with respect to the “gaming” category, the Commission is proposing to use the narrower definition discussed herein. The Commission is, however, proposing to define “gaming” to include the staking or risking of something of value on a contingent event in connection with a game or contest, which the Commission believes would be as much of a wager or bet on the game or contest as staking or risking something of value on the outcome of the game or contest would be. 74 See, e.g., N.Y. Penal Law section 225.00(2) (McKinney 2015) (A person engages in gambling when he stakes or risks something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome.); Mich. Comp. Laws section 750.301 (2023) (Any person or his or her agent or employee who, directly or indirectly, takes, receives, or accepts from any person any money or valuable thing with the agreement, understanding or allegation that any money or valuable thing will be paid or delivered to any person where the payment or delivery is alleged to be or will be contingent upon the result of any race, contest, or game or upon the happening of any event not known by the parties to be certain.); Va. Code Ann. section 18.2-325(1) (West 2022) (Illegal gambling means the making, placing, or receipt of any bet or wager of money or other consideration or thing of value, made in exchange for a chance to win a prize, stake, or other consideration or thing of value, dependent upon the result of any game, contest, or any other event the outcome of which is uncertain or a matter of chance.). (c) Illustrative Examples of Gaming In order to provide additional guidance to registered entities and market participants, the Commission proposes to set forth in new § 40.11(b)(2) a non-exclusive list of examples of activities that constitute “gaming,” as proposed to be defined. Proposed § 40.11(b)(2) states that “gaming” includes, but is not limited to, the staking or risking by any person of something of value upon: (i) the outcome of a political contest, including an election or elections; (ii) the outcome of an awards contest; (iii) the outcome of a game in which one or more athletes compete; or (iv) an occurrence or non-occurrence in connection with such a contest or game, regardless of whether it directly affects the outcome. The Commission emphasizes that the list of examples provided in proposed § 40.11(b)(2) is non-exclusive. To the extent that other activity falls within the definition of “gaming” set forth at proposed § 40.11(b)(1), such activity would also constitute “gaming.” The first three examples in the non-exclusive list reflect types of games or contests which, when something of value is staked or risked upon their outcome, have been recognized as gambling, betting, or wagering under relevant state and federal statutes, and would constitute “gaming” under the proposed definition in § 40.11(b)(1). 75 The first example reflects the Commission's prior determinations that “gaming” includes the staking of something of value upon the outcome of a political contest, including an election. 76 The Commission's prior determinations reflect, in turn, that several state statutes, on their face, link the terms “gaming” or “gambling” to betting or wagering on elections. 77 75 See section II.B.1.b, supra. 76 In the Nadex Order, which addressed certain event contracts on election outcomes, the Commission found that state gambling definitions of “wager” and “bet” were analogous to the act of taking a position in the subject contracts. Additionally, the Commission cited to the UIGEA definition of the term “bet or wager,” and found that taking a position in the subject contracts “fit[] the plain meaning” of a person staking something of value upon a contest of others, since the contracts were all premised—either directly or indirectly—on the outcome of a contest between electoral candidates. As in the Nadex Order, in the Kalshi Order, the Commission looked to definitions of the terms “gaming,” “gambling,” and “bet or wager,” including state and federal statutory definitions, and found that the subject contracts involved gaming, since taking a position in the contracts would be staking something of value upon the outcome of a contest of others: the contracts were premised on the outcome of Congressional election contests. As discussed, infra, the Commission further found in the Kalshi Order that the subject contracts involved “activity that is unlawful under . . . State law” pursuant to CEA section 5c(c)(5)(C)(i)(I) and § 40.11(a)(1). 77 See, e.g., 720 Ill. Comp. Stat. Ann. section 5/28-1 (West 2011) (A person commits gambling when he makes a wager upon the result of any game, contest, or any political nomination, appointment or election”); Neb. Rev. Stat. section 28-1101(4) (2011) (A person engages in gambling if he or she bets something of value . . . upon the outcome of a game, contest, or election.); N.M. Stat. Ann. section 44-5-10 (1978) (Bets and wagers authorized by the constitution and laws of the United States, or by the laws of this state, are gaming within the meaning of this chapter.); N.D. Cent. Code. Ann. section 12.1-28-01 (West 2011) (Gambling means risking any money upon the happening or outcome of an event, including an election . . . over which the person taking the risk has no control.). See also Ga. Code. Ann. section 16-12-21(a)(2) (West 2011) (A person commits the offense of gambling when he makes a bet upon the result of any political nomination, appointment, or election.); Miss. Code Ann. section 97-33-1 (West 2011) (If any person shall wager or bet upon the result of any election he shall be fined in a sum not more than Five Hundred Dollars.); S.C. Code Ann. section 16-19-90 (2012) (Any person who shall make any bet or wager of money upon any election in this State shall be guilty of a misdemeanor.); Tex. Penal Code Ann. section 47.02(a)(2) (West 2011) (A person commits an offense if he makes a bet on the result of any political nomination, appointment, or election.). For purposes of proposed § 40.11(b), the Commission would consider a political contest to include, but not to be limited to, a federal, state, or municipal election or primary contest for any political office, as well as any political contest in a foreign jurisdiction, including any political subdivision thereof, or in a supranational organization. For the avoidance of doubt, the Commission would consider an event contract to “involve” gaming if the contract is premised on the outcome of one or more political contests, or would otherwise amount to the staking or risking of something of value upon the outcome of one or more political contests. 78 78 Consistent with its determination in the Kalshi Order, where taking a position in a contract would be staking or risking something of value upon the outcome of a political contest, including an election or elections, the Commission would consider the contract also to involve activity that is unlawful under state law, pursuant to CEA section 5c(c)(5)(C)(i)(I) and § 40.11(a)(1). See Kalshi Order at 12-14. The inclusion of the staking or risking of something of value upon the outcome of a political contest as an example of “gaming” in proposed § 40.11(b)(2) highlights that the Commission's proposed definition is not limited to sporting events or other games. This reflects the similar approach taken in numerous state gambling statutes 79 as well as in the UIGEA, which defines a “bet or wager” to mean, in relevant part, the staking or risking by any person of something of value on the outcome of a contest of others, a sporting event, or a game subject to chance. 80 The separate “contest of others” category in the UIGEA definition demonstrates that “betting or wagering” (and, by extension, gaming) is recognized within a federal statutory framework as extending beyond sporting events and games of chance. 79 See, e.g., notes 71, 75, and 78, supra. 80 31 U.S.C. 5362(1)(a). In this regard, in its non-exclusive list of examples of “gaming” at proposed § 40.11(b)(2), the Commission includes the staking or risking of something of value upon the outcome of an awards contest. This would encompass, among other things, the staking or risking of something of value upon the outcome of entertainment award contests such as the Emmys, the Oscars, or the Grammys; athletics award contests such as the Heisman Trophy; or achievement award contests such as the Nobel Prize or the Pulitzer Prize. The Commission further includes as an example of “gaming” in proposed § 40.11(b)(2) the staking or risking of something of value upon the outcome of a game in which one or more athletes participate. This would encompass, among other things, the staking or risking of something of value upon the outcome of a professional or amateur (including scholastic) sports game. Finally, the Commission includes as an example of “gaming” in proposed § 40.11(b)(2) the staking or risking of something of value upon an occurrence or non-occurrence in connection with any of the previously described examples of contests or games—regardless of whether such occurrence or non-occurrence directly affects the outcome of such contest or game. As discussed above, the Commission is proposing to define “gaming” to mean—in addition to the staking or risking of something of value upon the outcome of a contest of others or a game of skill or chance, or the performance of one or more competitors in such contest or game—the staking or risking of something of value upon any other occurrence or non-occurrence in connection with a contest or game. The Commission makes clear, in proposed § 40.11(b)(2), that it is of no import whether or not such occurrence or non-occurrence directly affects the outcome of a contest or game. Such an occurrence or non-occurrence would encompass, for example: (i) whether a particular candidate enters or withdraws from a political contest, or polls above or below a certain threshold; (ii) whether a particular individual is nominated for an award or attends an award ceremony; and (iii) in the context of an athletic game, the score or individual player or team statistics at given intervals during the game, whether a particular player will participate in a game, and whether a particular individual will attend a game. The Commission notes that a number of states prohibit betting or wagering on a variety of occurrences or non-occurrences associated with athletic games, 81 as well as non-sporting events. 82 This highlights that in some instances, event contracts that involve “gaming,” as proposed to be defined, may also involve a second Enumerated Activity—“activity that is unlawful under . . . State law.” For example, as discussed in section I.C.3, supra, the Commission found in the Kalshi Order that the subject contracts involved both gaming and activity that is unlawful under state law. 83 While the Commission does not provide a complete catalogue herein of the types of betting or wagering that is prohibited under state law, it warrants recognition that in certain instances, event contracts that involve “gaming,” as proposed to be defined, may also involve activity that is unlawful under state law. 84 81 See, e.g. Va. Code Ann. section 58.1-4039 (A)(2) (West) (No person shall place or accept a proposition bet on college sports.). Ohio and Maryland have recently followed suit and banned player-specific proposition bets on college sports. See https://casinocontrol.ohio.gov/static/NCAA%20Request%20&%20Commission's%20Response/Response%20to%20the%20NCAA%20Regarding%20Proposition%20Wagers%20on%20Student%20Athletes%202022%2002%2023.pdf (Feb. 23, 2024 letter from the Ohio Casino Control Commission approving a request from the National Collegiate Athletic Association (“NCAA”) to prohibit player-specific proposition bets on intercollegiate athletics competitions); https://sbcamericas.com/2024/03/04/maryland-bans-college-athlete-props/ (describing a directive by the Maryland Lottery and Gaming Control Agency to all sportsbook operators in Maryland to remove college player proposition wagers from their platforms as of Mar. 1, 2024). See also Massachusetts Gaming Commission Says No Super Bowl Prop Bets This Year, NewBostonPost (Feb. 9, 2024), available at https://newbostonpost.com/2024/02/09/massachusetts-gaming-commission-says-no-super-bowl-prop-bets-this-year/. 82 For example, in Nevada, a sports book may not accept wagers on a non-sporting event unless specifically approved by the Gaming Commission; to date, the Nevada Gaming Commission has not approved wagers on awards shows or other non-athletic or certain “Esports” related events or contests. See Nev. Gaming Comm'n Reg. section 22.120, Permitted wagers (Rev. 2023) 83 Kalshi Order at 11-12. 84 See note 88, infra. While the Commission has exclusive jurisdiction over futures and swaps contracts traded on a CFTC-registered exchange, preempting the application of state law with respect to such transactions—and meaning that transacting in such contracts on a CFTC-registered exchange cannot, of itself, constitute unlawful activity for state law purposes—this does not preclude a contract from involving “activity that is unlawful under . . . State law” for purposes of CEA section 5c(c)(5)(C). As discussed above, the Commission recognizes that there may continue to be instances where contract-specific reviews will need to be commenced pursuant to § 40.11(c) in order to evaluate whether a particular contract involves “gaming,” as proposed to be defined. However, it is anticipated that the proposed definition and non-exclusive list of examples will assist in demarcating for registered entities and market participants the types of event contracts that involve “gaming” for purposes of § 40.11(a)(l), and thereby reduce the frequency with which such reviews must be commenced. Request for Comment The Commission requests comment on all aspects of its proposed definition of the term “gaming.” In particular, the Commission requests comment on the following questions: • Are there examples of activities that would constitute “gaming” that may fall outside of the proposed definition? • Are there other types of votes or elections that the Commission should specifically identify, for clarity, in the illustrative examples in proposed § 40.11(b)(2)? What types of other votes or elections should be identified, and why? • Should the availability at gaming venues of bets or wagers on a particular contingency, occurrence, or event be a relevant factor in the Commission's consideration of whether an event contract involving that contingency, occurrence, or event involves “gaming” for purposes of § 40.11? • If, on judicial review, it is determined that staking something of value on the outcome of a political contest does not involve “gaming,” the Commission may consider whether that activity is “similar to” gaming. Is staking something of value on the outcome of a political contest similar to gaming? • The Commission may also consider whether it should enumerate contracts involving political contests or some subset thereof as contracts involving a “similar activity” to any one or more of “war,” “terrorism,” “assassination,” or “activity that is unlawful under any Federal or State law” under CEA section 5c(c)(5)(C)(i)(VI) and determine that contracts involving this newly enumerated activity of political contests are contrary to the public interest. Are contracts involving political contests contracts involving a similar activity to any one or more of “war,” “terrorism,” “assassination,” or “activity that is unlawful under any Federal or State law”? If so, should the Commission determine such contracts are contrary to the public interest? 2. The Other Enumerated Activities The Commission does not believe that it is necessary to define “terrorism,” “assassination,” or “war” at this time. 85 With respect to “activity that is unlawful under any Federal or State law,” the Commission notes that the § 40.11(c) review that it conducted in connection with its determination in the Kalshi Order evaluated whether the subject Congressional control contracts involved this Enumerated Activity. In the Kalshi Order, the Commission found that, in many states, betting or wagering on elections is prohibited by statute or common law, and the Commission cited to the statutory provisions and caselaw prohibiting such activity that it had identified through a survey of relevant state law. 86 The Commission found that, because taking a position in the subject contracts would be staking something of value upon the outcome of contests between electoral candidates—in effect, betting or wagering on the outcome of elections—and because in many states such conduct is illegal, the subject contracts involved activity that was unlawful under state law. 87 85 The Commission clarifies, however, that it believes that cyberattacks and other acts of cyberterrorism constitute terrorism, and in some cases war, and are also likely to constitute activity that is unlawful under state or federal law. 86 Kalshi Order at 11-12. 87 CEA section 2(a)(1) grants the Commission “exclusive jurisdiction” over futures and swap contracts traded on a CFTC-registered exchange, 7 U.S.C. 2(a)(1). This “preempts the application of state law,” Leist v. Simplot, 638 F.2d 283, 322 (2d Cir. 1980), so transacting these contracts on a CFTC-registered exchange cannot, in and of itself, be an “activity that is unlawful under any . . . State law.” However, such contracts may still “involve . . . activity” that is unlawful under a state law, in the sense, for example, that transactions in the contracts may “relate closely” to, “entail,” or “have as an essential feature or consequence” an activity that violates state law. For example, in the Kalshi Order, the Commission found that state laws (which are not preempted by the CEA) prohibit wagering on elections. The Commission found that taking a position in the subject Congressional control contracts would be staking something of value on the outcome of contests between electoral candidates, such that wagering on elections was “an essential feature or consequence” of the contracts. Accordingly, the Commission found that while transactions in the contracts on a CFTC-registered exchange would not violate, for example, state bucket-shop laws, they nevertheless involved an activity that is unlawful in a number of states—wagering on elections. The Commission found that to permit such transactions on a CFTC-registered exchange would undermine important state interests expressed in statutes separate and apart from those applicable to trading on a CFTC-registered exchange. Id. at 13, note 28. The Commission anticipates that that the agency would in the future follow a similar approach—including a survey of relevant law—in circumstances where there is a question regarding whether an event contract submitted to the Commission involves activity that is unlawful under any state, or federal, law for purposes of § 40.11(a)(1). The Commission acknowledges that many state codes include laws prohibiting certain activity that, while not repealed, are generally considered archaic and are not enforced. The Commission believes that it is unlikely that a registered entity would seek to list for trading or accept for clearing an event contract involving such a law. To the extent that a registered entity does make a submission to the Commission regarding a contract that may involve such a law, the Commission believes that it may be appropriate to commence a review of the contract pursuant to § 40.11(c) to evaluate whether, in light of the relevant facts and circumstances, it is appropriate to recognize the contract as involving “activity that is unlawful under any . . . State law” for purposes of § 40.11(a)(1). The Commission notes further that a registered entity may receive a definitive resolution of any questions concerning the applicability of § 40.11(a)(1) by submitting a contract for Commission approval under § 40.3. CFTC staff also may, at its discretion and upon a request from a registered entity, review a draft contract submission or proposal and provide guidance concerning the contract's compliance with the CEA and CFTC regulations, including § 40.11(a)(1). 88 88 The Commission notes, however, that staff's guidance concerning drafts and proposals is preliminary and non-binding. CFTC staff formally reviews contracts only at such time as a compliant submission is provided to the Commission pursuant to § 40.2 or § 40.3. Request for Comment The Commission requests comment as to whether commenters agree with the Commission's view that a registered entity is unlikely to seek to list for trading or accept for clearing a contract that involves a state law prohibiting certain activity that, while not repealed, is generally considered archaic and is not enforced. C. Public Interest Considerations 1. Overview of Proposed Amendments As discussed above, CEA section 5c(c)(5)(C) provides that a registered entity may not list, or make available for clearing or trading, contracts in certain excluded commodities that involve an Enumerated Activity or prescribed similar activity, and that have been determined by the Commission to be contrary to the public interest. 89 The Commission interprets CEA section 5c(c)(5)(C) to provide that a contract may not be listed or made available for clearing or trading if the Commission finds both that: (i) the contract involves an Enumerated Activity or prescribed similar activity, and (ii) the contract is contrary to the public interest. 89 7 U.S.C. 7a-2(c)(5)(C). While CEA section 5c(c)(5)(C) requires the Commission to determine that a contract that involves an Enumerated Activity or prescribed similar activity is contrary to the public interest, in order for the contract to be prohibited from being listed or made available for clearing or trading, the statute does not require this public interest determination to be made on a contract-specific basis. The Commission interprets CEA section 5c(c)(5)(C) to authorize categorical public interest determinations if the Commission determines that contracts involving an Enumerated Activity or prescribed similar activity are, as a category, contrary to the public interest. 90 The Commission proposes to amend § 40.11(a)(1) to include a determination that event contracts involving each of the Enumerated Activities—including “gaming,” as proposed to be defined—are, as a category, contrary to the public interest and therefore may not be listed for trading or accepted for clearing on or through a registered entity. The Commission notes that, to date, it has conducted a contract-specific public interest analysis in connection with each of the contract reviews that it has commenced pursuant to § 40.11(c). 91 If, as proposed, § 40.11(a)(1) is amended to include a categorical public interest determination with respect to contracts involving each of the Enumerated Activities, the Commission would not, going forward, undertake a contract-specific public interest analysis as part of a review commenced pursuant to § 40.11(c). Rather, the focus of any such review would be to evaluate whether the contract involves an Enumerated Activity, in which case, it may not be listed for trading or accepted for clearing on or through a registered entity. The Commission believes this would be appropriate to ensure the consistent treatment of categories of contracts that have been determined by the Commission to be contrary to the public interest. The Commission notes its expectation, as discussed above, that defining the term “gaming” for purposes of § 40.11(a)(1) will further assist registered entities in their product design and compliance efforts, and will reduce the instances in which contract-specific reviews need to be commenced pursuant to § 40.11(c). 90 Further, the Commission's general rulemaking authority under CEA section 8(a)(5) provides the Commission with the authority to enact prophylactic regulations that, as proposed herein and for the reasons discussed below, the Commission has determined are reasonably necessary to prevent the listing for trading or acceptance for clearing of event contracts that will always violate the public interest, and to diminish the harms (such as inefficiency for market participants) caused by regular use of post hoc evaluations of contracts that exchanges have already expended resources to develop. CEA section 8(a)(5), 7 U.S.C. 12(a)(5) (authorizing the Commission “to make and promulgate such rules and regulations as, in the judgment of the Commission, are reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of [the CEA]”). 91 In the Nadex Order and the Kalshi Order, the Commission first determined that the subject contracts involved an Enumerated Activity (or Enumerated Activities), and then separately determined that the contracts were contrary to the public interest and therefore prohibited from being listed or made available for clearing or trading. See Nadex Order at 3-4; Kalshi Order at 13-23. 2. Factors Considered by the Commission in Evaluating Whether a Contract, or Category of Contracts, Is Contrary to the Public Interest The term “public interest” is not defined in CEA section 5c(c)(5)(C). As discussed more fully below, historically, the Commission has evaluated whether a contract is contrary to the public interest with reference to the contract's commercial hedging or price-basing utility. The Commission has also, however, regularly stated that other public interest factors may be considered. 92 In that historical context, the Commission observes that the event contract categories listed in CEA 5c(c)(5)(C)—for example, terrorism, war, assassination, and activity that is unlawful under any federal or state law—are indicative of additional public interest concerns for Congress, beyond a contract's hedging and price-basing utility, in establishing the heightened authority set forth in that provision. 92 See note 103, infra. The Commission reviewed the legislative history available to establish its own determination of what factors are relevant in a public interest evaluation under CEA section 5c(c)(5)(C). The legislative history of the provision is limited, but it does suggest an intent on the part of the drafters for the hedging and price-basing utility of a contract to be relevant factors for consideration in a public interest evaluation. 93 In the 2010 Colloquy, Senator Feinstein and Senator Lincoln discussed the Commission's authority, prior to the enactment of the Commodity Futures Modernization Act of 2000 (“CFMA”), to prevent trading that is contrary to the public interest. 94 Before its repeal by the CFMA, CEA section 5(g) made it a condition of initial and continuing contract market designation that transactions for future delivery not be contrary to the public interest. 95 The Commission interpreted this statutory public interest standard to include the concept of an “economic purpose” test. Pre-CFMA guidelines articulated the economic purpose test as an evaluation of whether a contract reasonably can be expected to be, or has been, used for hedging and/or pricing basing on more than an occasional basis. 96 93 The Commission has recognized price basing to occur when producers, processors, merchants, or consumers of a commodity establish commercial transaction prices based on the futures price for that or a related commodity. See, e.g., Kalshi Order at 18. 94 See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche Lincoln). 95 CEA section 5(g), 7 U.S.C. 7(g) (repealed). 96 The Commission adopted “Guideline No. 1” to assist DCMs in preparing applications for product approval. See Guideline on Economic and Public Interest Requirements for Contract Market Designation, 40 FR 25849 (June 19, 1975). Guideline No. 1 stated that DCMs should make an affirmative showing that a proposed futures contract was “reasonably expected to serve, on more than occasional basis,” as a price discovery or hedging tool for commercial users of the underlying commodity. Subsequently, the Commission revised Guideline No. 1, publishing it as appendix A to part 5 of chapter 17 of the Code of Federal Regulations. See 47 FR 49832 (Nov. 3, 1982). As revised in 1982, Guideline No. 1 was updated to address proposed innovations in the trading of futures contracts, including futures contracts on financial instruments and on various indexes and cash-settled futures contracts. Guideline No. 1 was again revised in 1992. 57 FR 3518 (Jan. 30, 1992). The 1992 revisions eliminated redundant materials by stating that an application for designation as a contract market for a particular futures contract should include a cash-market description only when the proposed contract differed from a currently designated contract and that a DCM need justify only individual contract terms that were different from terms which previously had been approved by the Commission. 57 FR at 3521. In addition, the 1992 revisions eliminated the guideline that a DCM provide a further, separate justification that the proposed contract would be quoted and disseminated for price basing, or used as a means of hedging against possible loss through price fluctuation on more than an occasional basis, noting that “the economic purpose of a contract is often implicit, or encapsulated, in the exchange's demonstration that the terms and conditions of the proposed contract meet the criteria of the Guideline [No. 1].” 57 FR at 3521-22, note 9. Former CEA section 5(g) was deleted by the CFMA, and Guideline No. 1 was accordingly also withdrawn by the Commission. In the 2010 Colloquy, Senator Feinstein and Senator Lincoln articulated the approach to evaluating a contract's hedging and price-basing utility differently from how the economic purpose test was applied under former CEA section 5(g). Senator Feinstein asked Senator Lincoln whether, with respect to CEA section 5c(c)(5)(C), the intent was to “define `public interest' broadly so that the CFTC may consider the extent to which a proposed derivative contract would be used predominantly by speculators or participants not having a commercial or hedging interest.” 97 Senator Feinstein further asked whether the Commission would “have the power to determine that a contract is a gaming contract if the predominant use of the contract is speculative as opposed to a hedging or economic use.” 98 Senator Lincoln replied, “That is our intent.” 99 Thus, while pre-CFMA Commission guidelines articulated the economic purpose test as an evaluation of “whether [a] contract reasonably can be expected to be, or has been, used for hedging and/or price basing on more than an occasional basis,” Senator Lincoln and Senator Feinstein referred instead to whether a contract is used predominantly by speculators or market participants not having a commercial or hedging interest. 97 156 Cong. Rec. S5906 (daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche Lincoln). 98 Id. 99 Id. While the articulation of the approach to evaluating hedging and pricing-basing utility differs from the pre-CFMA articulation, the 2010 Colloquy does suggest an intent on the part of the drafters of CEA section 5c(c)(5)(C) for the hedging and price-basing utility of a contract to be relevant considerations in a public interest review under that provision. As noted, this is not inconsistent with the approach taken in assessing whether a futures contract was contrary to the public interest under former CEA section 5(g), which contemplated application of the economic purpose test. In this regard, the Commission notes further that the general “Findings and Purpose” provision of the CEA, at CEA section 3(a), states that the transactions subject to [the CEA] . . . are affected with a national public interest by providing a means for managing and assuming price risks, discovering prices, or disseminating pricing information through trading in liquid, fair, and secure financial facilities. 100 Accordingly, the CEA recognizes hedging as a public interest, which certain transactions subject to the CEA—transactions providing a means for managing and assuming price risk—are intended to serve. 100 7 U.S.C. 5(a). As such, the Commission recognizes the utility of a contract, or category contracts, for purposes of hedging and price-basing to be relevant factors for consideration in evaluating whether the contract, or category of contracts, is contrary to the public interest pursuant to CEA section 5c(c)(5)(C). 101 While the articulation of the approach to evaluating hedging and price-basing utility differs in the 2010 Colloquy and under the pre-CFMA economic purpose test, the Commission anticipates that a contract, or category of contracts, that does not satisfy one such articulation also would likely not satisfy the other. 101 The Commission considered hedging and price-basing utility in its previous orders under CEA section 5c(c)(5)(C) and § 40.11. See Kalshi Order at 13-15; Nadex Order at 3. In the Kalshi Order the Commission found, among other things, that the event underlying the subject contracts—control of a chamber of Congress—did not, in and of itself, have “sufficiently direct, predictable, or quantifiable economic consequences” for the contracts to serve an effective hedging function. The Commission found that, since the economic effects of control of a chamber of Congress are “diffuse and unpredictable,” the price of the subject contracts was not directly correlated to the price of any commodity, and so the price of the contracts could not predictably be used to establish commercial transaction prices. The Commission found that, even if some level of political risk may be embedded in the price of many commercial transactions, that did not, in itself, support a finding that the subject contracts served a price-basing function. Kalshi Order at 16-17. Similarly, in the Nadex Order the Commission found that “the unpredictability of the specific economic consequences of an election means that the [subject contracts] cannot reasonably be expected to be used for hedging purposes . . .” Nadex Order at 3. The Commission found that there was no situation in which the subject contracts' prices could form the basis for the pricing of a commercial transaction, financial asset, or service, which demonstrated that the contracts did not have price-basing utility. Id. In this regard, the Commission reiterates that it has the discretion to consider other factors, in addition to hedging and price-basing utility, in its evaluation of whether a contract, or category of contracts, is contrary to the public interest for purposes of CEA section 5c(c)(5)(C). 102 This is consistent with the discretion of the Commission when evaluating whether a futures contract was contrary to the public interest under CEA section 5(g), prior to its repeal by the CFMA. 103 Accordingly, for the reasons discussed herein, and giving due consideration to the intentions reflected in the 2010 Colloquy, the Commission has determined that there are circumstances where other public interest considerations support prohibiting a contract, or category of contracts, from being listed for trading or accepted for clearing on or through a registered entity, even where such contract, or category of contracts, may have certain hedging or price-basing utility. 104 102 For example, in both the Nadex Order and the Kalshi Order, the Commission highlighted the public interest concerns that would be raised if registered entities were permitted to offer trading in event contracts involving the outcome of political elections. Nadex Order at 4; Kalshi Order at 19-20. 103 In the Senate conference report for the Commodity Futures Trading Commission Act of 1974, the conferees adopted an amendment that required a board of trade to demonstrate that transactions on it would not be contrary to the public interest, and “note[d] that the broader language of the Senate provision would include the concept of the `economic purpose' test provided in the House bill subject to the final test of the `public interest.' ” S. Rep. 1194, 93rd Cong. 2d Sess. 36 (1974). See also Economic and Public Interest Requirements for Contract Market Designation, 47 FR 49832, 49836 (Nov. 3, 1982) (“Congress made clear when it adopted the public interest test of Section 5(g) of the Act, that the public interest test is broader than, and includes, an economic purpose test” (citing the above-referenced Senate conference report). This public interest standard was not modified by the 1992 revisions to Guideline 1. See generally 57 FR 3518 (Jan. 30, 1992). 104 In the 2010 Colloquy, Senator Feinstein asked Senator Lincoln whether she agreed that CEA section 5c(c)(5)(c) would “empower the Commission to prevent trading in contracts that may serve a limited commercial function but threaten the public good by allowing some to profit from events that threaten our national security.” Senator Lincoln confirmed that she agreed, stating that while national security threats “pose a real commercial risk to many businesses in America,” contracts that permitted people to hedge that risk “would also involve betting on the likelihood of events that threaten our national security. That would be contrary to the public interest.” 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche Lincoln). With respect to other factors to be considered in a public interest review, the legislative history of CEA section 5c(c)(5)(C) supports consideration of whether the contract, or category of contracts, may threaten the public good. In the 2010 Colloquy, Senator Feinstein recognized contracts that would “allow[] some to profit from events that threaten our national security” as a threat to the public good. 105 Senator Lincoln similarly recognized that event contracts that allowed for the hedging of the commercial risks of terrorist attacks, war, and hijacking would also “involve betting on the likelihood of events that threaten our national security. That would be contrary to the public interest.” 106 The Commission believes this is plainly so given the terrible potential consequences of these activities. The Commission accordingly agrees with, and adopts, the view expressed in the 2010 Colloquy that national security and, more broadly, the public good, are relevant factors for consideration in an evaluation of whether a contract, or category of contracts, is contrary to the public interest for purposes of CEA section 5c(c)(5)(C). 105 Id. 106 Id. The Commission will consider all relevant factors in evaluating whether a contract, or category of contracts, is contrary to the public interest, and there is no one factor that will be determinative in the Commission's evaluation. In addition to hedging utility, price-basing utility, and threats to national security or other threats to the public good, some of the factors that may be relevant when the Commission is evaluating whether a contract, or category of contracts, is contrary to the public interest include: (i) the extent to which the contract, or category of contracts, would draw the Commission into areas outside of its primary regulatory remit; 107 (ii) whether characteristics of the contract, or category of contacts, may increase the risk of manipulative activity relating to the trading or pricing of the contract; 108 and (iii) whether the contract, or category of contracts, could result in market participants profiting from harm to any person or group of persons. 109 107 See, e.g., Kalshi Order at 22-23. 108 See, e.g., id. at 21-22. The Commission notes that DCMs and SEFs have a statutory obligation to ensure that the contracts that they list for trading are not readily susceptible to manipulation. See Core Principle 3 for DCMs, CEA section 5(d), 7 U.S.C. 7(d)(3), and Core Principle 3 for SEFs, CEA section 5h(f)(3), 7 U.S.C. 7b-3(f)(3). The Commission distinguishes the type of review that would be undertaken to evaluate whether a contract submission to the Commission, pursuant to § 40.2 or § 40.3, demonstrates compliance with this statutory obligation, from the type of review that would be undertaken to evaluate whether increased risk of manipulative activity may raise public interest concerns regarding a contract, or category of contracts, for purposes of CEA section 5c(c)(5)(C). The Commission notes that a review for purposes of CEA section 5c(c)(5)(C) would be to determine whether a contract, or category of contracts, should be per se prohibited from being listed for trading or accepted for clearing on or through a registered entity because it is contrary to the public interest. 109 In the 2010 Colloquy, Senator Lincoln stated that CEA section 5c(c)(5)(C) was intended, in part, to ensure that the Commission had the power “to prevent the creation of futures and swaps markets that would allow citizens to profit from devastating events.” See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche Lincoln). The Commission notes that the factors that inform a public interest determination, and the weight given to each such factor, are likely to vary depending on the particular characteristics of the contract, or category of contracts, that are being evaluated. Request for Comment The Commission requests comment on all aspects of its discussion of the factors to be considered in evaluating whether a contract, or category of contracts, is contrary to the public interest for purposes of CEA section 5c(c)(5)(C). In particular, the Commission requests comment on the following questions: • Should hedging and price-basing utility be considered as factors when evaluating whether a contract, or category of contracts, is contrary to the public interest? Why or why not? • If hedging and price-basing utility should be considered as factors when evaluating whether a contract, or category of contracts, is contrary to the public interest, how should such utility be assessed? • Are there factors, in addition to those described herein, that may be relevant when evaluating whether a contract, or category of contracts, is contrary to the public interest? Are there any factors the Commission should specifically not consider? Why or why not? 3. The Enumerated Activities The Commission proposes to amend § 40.11(a)(1) to include a determination that any event contract that involves an Enumerated Activity—including “gaming,” as proposed to be defined—is contrary to the public interest and therefore may not be listed for trading or accepted for clearing on or through a registered entity. (a) Terrorism, Assassination, and War The Commission recognizes the Enumerated Activities of terrorism, assassination, and war as activities that pose a threat to national and international security and entail violence and human suffering. The Commission believes that it would be contrary to the public interest to allow event contracts involving such activities to trade on CFTC-regulated markets. The Commission believes that allowing such contracts to trade would raise a real risk that the contracts, and markets for the contracts, could be used to “profit from devastating events.” 110 Allowing trading in contracts involving terrorism, assassination, or war could incentivize certain market participants to take a speculative position on whether these devastating events will occur, or how wide-reaching their impact will be—a type of speculation that the Commission believes, at a base level, is offensive and has no place in CFTC-regulated markets. Allowing trading in such contracts might even increase the risk of a terrorist attack, assassination, or act of war by creating financial incentives for a potential perpetrator to take a position in such a contract and then profit by carrying out the heinous act that the contract involves. The national and international security concerns and threat to the public good raised by terrorism, assassination, and war are so significant that the Commission must consider very seriously even the slightest risk that CFTC-regulated markets could create a means or motive to profit from such activity. 111 Accordingly, in circumstances where an event contract involves terrorism, assassination, or war, the Commission believes that the public interest concerns that would be raised by allowing the contract to be traded as a financial instrument on CFTC-regulated markets, as described above, would supersede any potential price-basing or hedging utility of the contract. 110 Id. 111 Similar concerns led to the shutdown in 2003 of the Futures Markets Applied to Prediction (“FutureMAP”) program proposed by the Defense Advanced Research Projects Agency (“DARPA”), an office within the United States Department of Defense. The FutureMAP program would have permitted traders to take positions on questions such as whether a particular political leader would be assassinated or whether a bioterror attack would occur. Senators raised concerns that the market would permit the perpetrator of a terrorist attack to profit from that attack. Senator Tom Daschle raised concerns that the market could actually incentivize terrorist attacks (“How long would it be before you saw traders investing in a way that would bring about the desired result”), and Senators Byron Dorgan and Ron Wyden characterized the project as “morally repugnant,” “offensive,” and “grotesque.” See “Threats and Responses and Criticisms; Pentagon Prepares a Futures Market on Terror Attacks,” The New York Times, July 29, 2003, available at https://www.nytimes.com/2003/07/29/us/threats-responses-plans-criticisms-pentagon-prepares-futures-market-terror.html; “Pentagon Kills `Terror Futures Market,' ” NBC News, July 29, 2003, available at https://www.nbcnews.com/id/wbna3072985; 149 Cong. Rec. S10082-83 (daily ed. July 29, 2003), available at https://www.congress.gov/congressional-record/volume-149/issue-114/senate-section/article/S10082-1. The Commission therefore proposes to amend § 40.11(a)(1) to include determinations that any event contract that involves terrorism, assassination, or war is contrary to the public interest and may not be listed for trading or accepted for clearing on or through a registered entity. Request for Comment The Commission requests comment on all aspects of its proposed public interest determinations with respect to contracts involving terrorism, assassination, and war. In particular, the Commission requests comment on whether there are contracts that may involve terrorism, assassination, or war that do not raise the above-described public interest concerns. Why, or why not? (b) Activity That is Unlawful Under Federal or State Law The Commission similarly proposes to amend § 40.11(a)(1) to include a determination that any event contract that involves activity that is unlawful under federal or state law is contrary to the public interest and may not be listed for trading or accepted for clearing on or through a registered entity. As an independent agency of the federal government, the Commission exercises the authorities granted to it by Congress under the CEA to help ensure that U.S. derivatives markets operate with integrity. The Commission believes that it is contrary to the public interest to permit trading, in the financial markets that the Commission is mandated by Congress to oversee, in any event contract that involves activity that Congress has determined to be illegal. The Commission further believes that it is contrary to the public interest to permit trading in any event contract that involves activity that is illegal under state law. Legislative bodies are intended to serve the public good, and such bodies generally bar or prohibit activity that they recognize as causing, or posing, public harm. Judges and judicial bodies, applying statutes and developing common law, also establish the illegality of activity that is recognized as causing, or posing, public harm. 112 The Commission thus believes that permitting trading, on CFTC-regulated markets, in contracts that involve activity that is unlawful under state law—and potentially in some circumstances creating opportunities to profit from illegal activity—would undermine important state interests, expressed in state statutes and common law, in protecting the public good. 113 This is also a matter of comity with states. 112 The Commission noted such common law prohibitions, and related policy concerns, with respect to wagering on elections in the Kalshi Order. Kalshi Order at 11-12, note 27. 113 While the Commission has exclusive jurisdiction over futures and swaps contracts traded on a CFTC-registered exchange, preempting the application of state law with respect to such transactions—and meaning that transacting in such contracts on a CFTC-registered exchange cannot, of itself, constitute unlawful activity for state law purposes—this does not preclude a contract from involving “activity that is unlawful under . . . State law” for purposes of CEA section 5c(c)(5)(C). The Commission notes that there are variations across state law in the specific activities that are recognized as unlawful. The Commission believes that a determination that an event contract that involves activity that is unlawful under state law is contrary to the public interest—which turns the focus of the analysis to the questions of whether the activity, itself, is recognized as unlawful, and, if so, whether the contract “involves” such unlawful activity—eliminates the possibility that the Commission would have to serve, in its public interest analysis of a particular contract involving particular activity, as arbiter of a state's own public interest determination, as expressed in statute and/or common law, in recognizing specific activity as causing, or posing, public harm. Request for Comment The Commission requests comment on all aspects of its proposed public interest determination with respect to contracts involving activity that is unlawful under federal or state law. In particular, the Commission requests comment on whether there are contracts that may involve such activity that do not raise the above-described public interest concerns. Why, or why not? (c) Gaming As discussed above, the Commission is proposing to define the term “gaming,” for purposes of § 40.11, as the staking or risking by any person of something of value upon: (i) the outcome of a contest of others; (ii) the outcome of a game involving skill or chance; (iii) the performance of one or more competitors in one or more contests or games; or (iv) any other occurrence or non-occurrence in connection with one or more contests or games. The proposed definition draws upon the approach taken, in relevant state and federal statutory definitions, to defining the terms “gambling,” “betting,” or “wagering,” which, as discussed above, are generally used interchangeably with the term “gaming.” The Commission proposes to amend § 40.11(a)(1) to include a determination that any contract that involves “gaming,” as proposed to be defined, is contrary to the public interest. Both economic utility and other public interest factors inform the Commission's preliminarily determination that event contracts involving gaming should not be permitted to trade on CFTC-regulated markets. The Commission believes that by defining “gaming” in a manner that draws upon the approach taken, in relevant state and federal statutory definitions, to defining the terms “gambling,” “betting,” or “wagering,” the Commission is in turn identifying, for purposes of § 40.11, contracts that “exist predominantly to enable gambling.” 114 The Commission believes that the economic impact of an occurrence (or non-occurrence) in connection with a contest of others, or a game of skill or chance—including the outcome of such contest or game—generally is too diffuse and unpredictable to correlate to direct and quantifiable changes in the price of commodities or other financial assets or instruments, limiting the hedging and price-basing utility of an event contract involving such an occurrence. Generally speaking, the Commission believes that something of value is staked or risked upon an occurrence (or non-occurrence) in connection with a contest of others, or a game involving skill or chance, for entertainment purposes—in order wager on the occurrence. As such, the Commission believes that contracts involving such occurrences are likely to be traded predominantly “to enable gambling” 115 and “used predominantly by speculators or participants not having a commercial or hedging interest,” and cannot reasonably expected to be “used for hedging and/or price basing on more than an occasional basis.” 116 114 In the 2010 Colloquy, when discussing the Dodd-Frank Act provision that was ultimately enacted as CEA section 5c(c)(5)(C), Senator Lincoln stated that “[t]he Commission needs the power to, and should, prevent derivatives contracts that are contrary to the public interest because they exist predominantly to enable gambling through supposed “event contracts.” See 156 Cong. Rec. S5906-07 (daily ed. July 15, 2010) (statements of Sen. Diane Feinstein and Sen. Blanche Lincoln). The Commission is aware that the legal landscape with respect to certain forms of gambling has changed since CEA section 5(c)(c)(5)(C) was adopted in 2010, and § 40.11 was adopted in 2011. Specifically, in 2018, the Supreme Court in Murphy v. N.C.A.A., 584 U.S. 453, 138 S.Ct. 1461, struck down The Professional and Amateur Sports Protection Act (“PAPSA”). PAPSA had prohibited states from authorizing state-sponsored gambling on sporting events or permitting other persons to operate and promote such sports gambling schemes. Following this decision, many states have legalized various forms of sports gambling. The Commission highlights, however, the determination of Congress to identify “gaming” as an Enumerated Activity, separate and apart from activity that is unlawful under federal or state law. This indicates Congressional intent—supported by the 2010 Colloquy—to empower the Commission to prohibit event contracts that would effectively serve as a wagering vehicle, subject to a Commission determination that such contracts are contrary to the public interest. To this point, the Commission notes that there were forms of legalized gambling in the United States when CEA section 5c(c)(5)(C) was adopted ( e.g., casino sportsbooks in states such as Nevada and New Jersey). 115 Id. 116 See section II.C.2, supra. While there may be individuals or entities for whom a particular occurrence in connection with a contest or game have more direct and more predictable economic consequences, the Commission believes that any such segment of individuals or entities is likely to be narrow as compared to the broader universe of market participants, including retail market participants, who may be able to trade in an event contract listed on a CFTC-registered exchange—and who, the Commission believes, are most likely to trade such contract for entertainment purposes only. Moreover, the Commission believes that an individual or entity for whom a particular occurrence in connection with a contest or game may have more direct and more predictable economic consequences may also be more likely to have access to information and/or influence that could be used to engage in activity that could artificially move the market in an event contract involving such occurrence, potentially raising heightened manipulation concerns. For example, a professional athlete or coach may be economically impacted by their team's wins or losses, but may also have access to information—for example, about a team member's health or a potential injury—that could be used to trade ahead of the market in an event contract involving the team's performance. Further, the athlete or coach would potentially have a platform—for example, acce [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-12125. Public record. Not legal advice.